Professional Documents
Culture Documents
VERMONT SENSE
A Handbook for Investors, Businesses,
Finance Professionals, and Everybody Else
BY MICHAEL H. SHUMAN
& GWENDOLYN HALLSMITH
Foreword by STUART COMSTOCK-GAY
ii
iii
PARTNERS
Post Carbon Institute
http://www.postcarbon.org
Vermonters for a New Economy
http://www.global-community.org/
vermontersforaneweconomy.htm
Global Community Initiatives
http://www.global-community.org
The Public Banking Institute
http://www.publicbankinginstitute.org/
The Fresh Sound Foundation
http://freshsoundfoundation.org/
iv
Gwendolyn Hallsmith
Gwendolyn Hallsmith, is the founder and Executive
Director of Global Community Initiatives and one of the
founders of Vermonters for a New Economy, both nonprofit organizations based in Vermont. She is the author
of The Key to Sustainable Cities: Meeting Human Needs,
Transforming Community Systems (New Society, 2003);
FOREWORD
By Stuart Comstock-Gay
Reading this book, I am reminded of the power of
community.
One of the great challenges of life in the 21st century
is capturing that sense of community. We live in a world
that is simultaneously larger and smaller. Its larger in that
we have opportunities to experience so much more than
ever before. We can travel, move, see and experience things
that would have been unimaginable to our ancestors. Our
vistas of the world are bigger. But its also a smaller world
because while we can see so much more, it often seems that
our ability to control our livesour sphere of influenceis
ever reduced. Its that latter point that troubles me. We all
need to have hope that what we do matters.
We all need a sense of community. And we all need
to believe that we have agencya sense that we can make
choices that will affect our lives.
This book captures an entire set of efforts that seek to
restore our sense of agency and hope and community. By
using our financial resources to invest in our neighbors and
their workswhether in small businesses or to support
housing projects, or so many other thingswe can begin to
recapture our communities, and our sense of community.
The reality of the modern world is that activities in
China and Turkey and Somalia matter for us in very real
ways. And part of our attention will necessarily be on the
vi
CONTENTS
INTRODUCTION .
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Personal Finances . . . . . . . . . . . . . . . . . . . 16
Cooperatives . . . . . . . . . . . . . . . . . . . . 18
Local Bank or Credit Union . . . . . . . . . . . . . . . . 20
Self-Directed IRA . . . . . . . . . . . . . . . . . . . 22
Pension Fund . . . . . . . . . . . . . . . . . . . . 24
Local Investment Club . . . . . . . . . . . . . . . . . . 26
. 29
Conventional Sources . . . . . . . . . . . . . . . . . . 30
Accredited Investors . . . . . . . . . . . . . . . . . . 32
Program Related Investments . . . . . . . . . . . . . . . . 34
Cooperative Options . . . . . . . . . . . . . . . . . . 36
Pre-Selling . . . . . . . . . . . . . . . . . . . . . 38
Sponsorship Websites . . . . . . . . . . . . . . . . . . 40
P2P Lending Sites . . . . . . . . . . . . . . . . . . . 42
vii
. 51
Credit Union . . . . . . . . . . . . . . . . . . . . 52
Targeted CDs . . . . . . . . . . . . . . . . . . . . 54
Federal Programs . . . . . . . . . . . . . . . . . . . 56
Local Investment Fund . . . . . . . . . . . . . . . . . . 58
Local Stock Market . . . . . . . . . . . . . . . . . .
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Local Mutual Fund . . . . . . . . . . . . . . . . . .
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MULTI-CONSTITUENT TOOLS .
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1. Investor Networks . . . . . . . . . . . . . . . . . . . 66
2. Community Lists . . . . . . . . . . . . . . . . . . . 68
3. Slow Munis . . . . . . . . . . . . . . . . . . . .
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RESOURCE LIST .
ENDNOTES .
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viii
INTRODUCTION
A powerful local economy movement is now sweeping
across the United States and around the world. More than
a thousand American cities and towns have local business
networks or related projects led by such groups as the
American Independent Business Alliance (AMIBA), the
Business Alliance for Local Living Economies (BALLE),
and the Main Street Program of the National Trust for
Historic Preservation. Organizations like Transition
Network and Slow Food are engaging tens of thousands of
other communities worldwide. In all of these places people are attempting to strengthen local businesses, promote
buy local campaigns, and end subsidies and other unfair
advantages given to nonlocal businesses.
One motivation spurring this movement is concern
about climate change. Businesses, institutions, and individuals are divesting from fossil fuels and looking for genuine alternatives to the carbon-intensive companies that
dominate the global marketplace. They are not satisfied
with taking investment away from Exxon Mobil and simply moving it to global firms that depend on fossil fuels
to support globe-spanning manufacturing and distribution
networks.
Another motivation is fear of financial loss. During the
financial crisis of 2008 and the years that followed, stock
markets, home values, and job opportunities all plummeted.
Growing public distrust of Wall Street launched movements like Occupy Wall Street and Move Your Money, the
latter of which organized more than a million Americans
2
Then in the remainder of the handbook we present
tools for local investment, organized into five areas:
1. Tools for grassroots investors looking for local business
opportunities.
2. Tools for businesses looking for local investors.
3. Tools for finance entrepreneurs looking to start local
investment institutions.
4. Multi-constituency tools which could be used by anyone, including grassroots activists.
5. Legal and regulatory reforms that states can undertake
to support all the above tools.
4
of giving incentives to nonlocal business, had a
similar finding: Economic growth models that
control for other relevant factors reveal a positive
relationship between density of locally owned
firms and per capita income growth, but only for
small (10-99 employees) firms, whereas the density
of large (more than 500 workers) firms not owned
locally has a negative effect.4
Still another paper, recently published by the
Federal Reserve in Atlanta, looked at counties
across the United States and found statistically
significant evidence that local entrepreneurship
matters for local economic performance... [T]he
percent of employment provided by resident, or
locally owned, business establishments has a significant positive effect on county income and
employment growth and a significant and negative
effect on poverty.5
Local businesses deliver many other benefits to communities besides jobs:
ProsperityBecause local businesses spend more of
their money locally, they generate a stronger economic multiplier effect. Studies show that every
dollar a consumer spends at a local business tends
to generate two to four times the income, taxes,
and charitable contributions as a dollar spent at a
comparable nonlocal business.6
Social MobilityLocal businesses expand opportunities for entrepreneurship, which then provide
5
unprepared.9 Local businesses, and the localized economic
systems in which they operate, are essential to help communities inoculate themselves from these crisis through greater
self-reliance.
Ultimately, local is all about building a community
economy made up of humane relationships. As Michelle
Long, executive director of BALLE, says, The point of
local is being able to put a human face behind the transaction. Money is nothing but the moving current beneath us,
showing what we care for.
6
expected to gain 18percent more jobs in a typical year. A
risk-averse local investor might focus on those local businesses that have operated profitably and grown steadily for
five to ten years.
Local small businesses have remained competitive in an
environment where public officials and economic developers have essentially tried to kill them. A survey recently completed of the three largest economic-development programs
in 15 states found that 80% were giving most of their money
to attract and retain global business; about a third gave well
over 90% of their funds.12 The impact of these subsidies, if
not the intent, is to make small business less competitive.
And yet the home-grown competitors held their own.
The tilt of public policies against local businesses goes
well beyond economic-development subsides. Generations of
federal corporate welfare, ranging from tax breaks to outright
giftsand including trillion-dollar military deployments in
the Middle Easthave made fossil fuels unnaturally cheap.
Public infrastructure favoring global trade like highways, airports, and seaports has been generously underwritten by public dollars, while infrastructure supporting local businesses
like community parking lots and intra-city transit have been
starved. State sales taxes are largely unenforced against internet giants like Amazon. Trade rules ban communities from
placing labels on products letting consumers know whether
they were made locally. Antitrust laws that once would have
forbidden the way that Walmart whipsaws its suppliers have
been largely unenforced.
Even if foolish public policies remain in place, deeper
trends in the global economy are likely to make local business more competitive in the years ahead. For example, in
7
powered our machinery, and brought the entire world into
an industrial age. Periodic shortages, such as during the
OPEC embargos of the 1970s, and periodic price spikes,
such as during the summer of 2008 when gasoline was topping $5 per gallon in some areas, have reminded us of our
dangerous dependence on cheap crude. These events, however, provided just a preview of an era we can barely imagine. With reserves of conventional cheap oil dwindling,
were increasingly meeting global demand with expensive
unconventional oil, much of which comes from more technologically challenging resources like deepwater oil in the
Gulf of Mexico, shale oil from the fracked fields of North
Dakota and Texas, or low-quality tar sands in Alberta. This
means that oil is almost inevitably going to be more expensive in the coming decades. While renewable energy offers
a long-term alternative, we will not be able to decouple
the vast infrastructure of the industrial world, especially its
transportation systems, from fossil fuels overnight.13
The features of this post-petroleum era will almost
certainly increase the competitiveness of local business.
Rising oil prices will benefit community-based energy service companies, solar-equipment installers, and household
geothermal services. As more people balk at skyrocketing
costs of commuting to work, they will increasingly turn to
home-based businesses. And common practices in todays
economy, such as Walmart contracting with manufacturers to produce cheap consumer goods in low-wage places
like China and shipping them thousands of miles to stores
throughout North America, will no longer be tenable.
About a quarter of the goods that we consume are
durable; that is, things that last for a few years or (if were
lucky) decades. These cars, appliances, gadgets, computers, toys, housewaresall the stuff that in recent years has
been largely manufactured abroadonly constitute about
a tenth of our total consumer spending. Most of our expenditures on goods are for nondurables, things that tend to
be used or consumed relatively quickly like food, textiles,
clothing, office supplies, and paper products.14
The distinction on durability is critical, because
imports of nondurable goods are particularly vulnerable
to rising oil prices. Compared to, say, durables like microchips, the nondurable goods tend to weigh more and contain less value per pound. As energy prices and shipping
costs rise, imports of nondurable goods may be among the
first casualties. This means that local production of food
and clothing coupled with local distribution, for example,
will once again be competitive against Walmart importing
goods from China. Rising transportation costs will swamp
long-shrinking labor costs. Thus, rising oil prices will usher
in a local economy renaissance worldwide. Manufacturing
of nondurable goods will make a comeback.
So, to recap: Local businesses have held their own
against the global competition over the past generation,
despite public policies tilted against them. And a number
of trends, like the shift to services and rising oil prices, will
boost the competitiveness of local businesses even further.
8
sector is highly competitive and profitable, then its not a
huge leap to infer that a healthy capital marketplace would
ensure that roughly half our available investment capital
would go into the local half of the economy. In fact, very
little does.
For example, local businesses receive far less than half
of the lending capital from banks. Even though small and
mid-size banks account for about a fifth of all the capital
in U.S. banks, they are responsible for more than half of all
small-business lending. Bigger banks, which control most
short-term capital, prefer lending to bigger businesses. From
a banks perspective, if a big loan takes as much work as a
small loan while promising bigger payoffs, why not go big?
This capital market failure is even more profound
when it comes to long-term securities like stocks, bonds,
mutual funds, pension funds, and insurance funds. The
holdings that U.S. households and nonprofits have in
these categories amount to about $30 trillionalmost
four times the size of their banking deposits. And yet
almost none of this $30 trillion touches local business. If
the U.S. capital markets were functioning efficiently, at
least half of this sum, $15 trillion, would move from Wall
Street to Main Street.
What stands in the way of this shift are obsolete institutions and laws that make local investment extremely difficult
and expensive. Securities laws from the Great Depression
effectively enacted a system of investment apartheid, with
accredited investors being able to invest in any business
they wish and unaccredited investors being essentially told
to stick with Wall Street. Accredited investors comprise the
richest two percent of Americansthose who earn more
9
Democratic majority on Capitol Hill felt compelled to pass
the so-called Dodd-Frank reform legislation (named for
the cosponsors, Senator Chris Dodd of Connecticut and
Representative Barney Frank of Massachusetts). Congress
imposed stiff new regulations on all banks, with no awareness that these were irritating but manageable for large
banks while being utterly unaffordable for small banks. As
a result, a heartbreaking new wave of bank consolidation is
under way, which will further reduce the capital available
for small business.
But there have been some important countervailing
trends. Over the past 50 years, modest pieces of legislation have attempted to increase community reinvestment.
The Community Reinvestment Act of 1977 put an affirmative obligation on banks to invest more of their capital locally. The 1980s saw the introduction of Community
Development Financial Institutions (CDFIs), a program
that rewards financial institutions that help economically
marginalized people with grants and other benefits from
the federal government. The New Markets Tax Credits
(NMTC) program established in 2000 incentivizes accredited investors to place capital into low-income communities
for seven years.
Note, however, that none of these programs improved
the investment opportunities for the 98% of us who are
unaccredited.
Thats why recent reforms have been particularly
important. The federal JOBS Act (JOBS stands for
Jumpstart Our Business Sector) could make it easier and
cheaper for local businesses to take money from unaccredited investors. President Obama signed this law in 2012,
10
Stage I: We have to make it easier and cheaper for
small businesses to issue securities to unaccredited
local investors.
Stage II: We have to make it easier and cheaper for
those unaccredited investors to trade their shares
on local stock exchanges.
Stage III: We have to make it easier and cheaper for
unaccredited investors to invest in local investment
funds, where financial specialists can perform the
hard work of choosing and trading local securities.
Stage IV: We have to make it easier and cheaper for
the fiduciary agents running pensions, trusts, and
other funds to place unaccredited clients money
into local investment pools.
These four changes, moreover, must proceed more or
less in the order laid out above. That is, few fiduciary agents,
like pension fund managers, will begin to invest funds locally
when there are few local investment funds with a reasonable
track record of profitability. Few such intermediaries will
be established until there are local exchanges that allow the
fund to buy and sell securities (illiquid securities are potentially worthless15). And no local exchanges in a region will be
set up until there are enough local securities to trade.
This logical sequencing underscores why its premature
to begin with a Stage IV question like How can I localize my
pension fund? College organizers are admirably pushing for
their trustees to divest from fossil fuel companies responsible for greenhouse-gas emissions and reinvest in community
businesses, but unfortunately the infrastructure needed for
redirecting those investments barely exists. Although these
11
is no good reason why the investors in local businesses ultimately should not enjoy equal or better rates of return. The
key word, however, is ultimately. In the absence of local
stock markets, for example, its harder to buy and sell shares
of companies, which imposes greater costs on anyone who
wants to invest locally. Over time, as local stock markets
provide greater liquidity and local investment funds provide greater diversification, this problem should dissipate.
One reason why many investors are skeptical of local
investment is that they assume that leaving their money on
Wall Street is paying 8-12% per year. In fact, data available
from Yale professor Robert Shiller, who recently won the
Nobel Prize in Economics, show that the average annual
rate of return of the Standard & Poors 500 indexwhen
dividends are added but inflation is removedis about
2.7%.16 Moreover, we know that most mutual funds underperform market averages, and most hedge funds underperform mutual funds. The challenge of local investments
beating a 2.7% return each year is not wildly unrealistic.
Many co-ops, for example, currently pay 5-8% per year on
funds borrowed from their members.
Finance professionals also instinctively believe that
local investing is riskier than conventional investing. And
there are three good reasons why this is probably true:
A company looking exclusively for local investors
will find fewer of them and be less likely to obtain
full funding.
Investors looking only at local companies will find
fewer worthwhile candidates and thus may be
more likely to end up with investments that do not
12
returns, in other words, wind up benefitting everyoneincluding the investor.
Local investors tend to be less passive than other
investors. Owners of a co-op grocery store, for
example, become its best marketers, volunteers,
and event participantsall of which increases the
probability of the business succeeding and paying
a good rate of return.
Because local businesses tend to spend more money
locally, their multipliers naturally improve the
prospects of neighboring businesses. So an investment portfolio of local businesses might enjoy the
benefits of a positive feedback loop, with all the
businesses in the portfolio supporting each others
success.
And, of course, by supporting local and regional
economies, local investing strengthens community
resilience, which in turn supports the long-term
viability of businesses and investors alike.
The science of local investing is still young. As we
develop tools for creating affordable investment vehicles,
for evaluating businesses objectively, for making local securities tradable, and for assembling diversified local portfolios, local investors will more easily be able to identify the
opportunities with the greatest return and the lowest risk.
13
16
1. PERSONAL FINANCES
Description
Local investment does not have to mean investing in another
companyit can mean investing in yourself, your kids, or
your house. In fact, there are many promising places where
you can put your money and get a rate of return that beats
Wall Street. Remember that the average Wall Street investor
is only getting about 2.7% return per year. Even if you set
your goal highersay, 5% return per yearthere are many
ways you might achieve this on your own. For example,
getting rid of credit card balances effectively will pay you
15-30% per year. As the Sage of Omaha, Warren Buffett,
says, Nobody ever goes broke that doesnt owe money.17
Another easy way to beat Wall Street is to become a
homeowner. A home purchase really delivers two different
kinds of valuable rewards. One is that youve got a place to
live. Instead of paying a landlord every month, you effectively become your own landlord. Yes, you have a big debt
in the form of a mortgage, but as you pay it down, you grow
an asset that ultimately eliminates your rent. That asset is
your second reward, which you ultimately can liquidate for
your retirement. At some point, if you need the cash, you
can sell your home and move into a smaller one. Or you can
secure a reverse mortgage that pays you an income stream
and gradually works you out of ownership.
Among the factors that make homeownership a
great investment is you can deduct interest payments on
your mortgage from your taxes, and once the mortgage
Challenges
Many Americans, after suffering through years of stagnant
wages and a terrible financial crisis, do not have enough
savings for a down payment on a house. As they accumulate any savings, moreover, they are surrounded by finance
experts who encourage them to put money into their
Wall-Street destined 401(k) or IRA. In fact, the smartest
move is to ignore the experts, pay down the credit cards,
and amass enough of a down payment to get at least a small
home.
17
An Intergenerational Mortgage
The members of one Vermont family (who, in true New
England fashion, wish to remain anonymous) recently discovered that they could divest from Wall Street by lending
to one another. The older generation needed a safe investment; the younger generation needed housing. The solution was obvious. All it took was for some family members
to think more like bankers.
Rather than having their adult children go to a bank
for a mortgage, the parents offered to cash out some of their
stocks and give their kids a loan. Even in the real estate
bubble period of 2004-2008, they realized that they could
receive a better return from private mortgage payments
than they likely would from either Wall Street investments
or bank deposits. Meanwhile, the kids realized that they
would pay less than they would for a bank mortgage. And
it was all strictly local, since the parents were Vermonters
and were not going to resell their childrens mortgage on the
secondary market.
The parents reckoned that in a worst-case scenario, if
they had a sudden need for money for expenses the children
would have enough equity in the home to get a conventional mortgage. So even though real estate does not tend to
be very liquidit takes lots of time to sell a housethere
are ways that a deal like this can cover the expected cash
needs of everyone involved.
Fortunately for the family, the stocks were sold in the
spring of 2008, before the crash. The cash was then loaned
to the children, using the same documents banks do for a
mortgage. A schedule of payments was established, with the
18
2. COOPERATIVES
Description
Consumer cooperatives offer another readily available local
investment opportunity for grassroots investors. When you
join a co-op, you put your capital into an enterprise that
rewards you with discounts and other benefits. Additionally,
the more you use a consumer cooperative, the larger your
patronage dividend: your end-of-the-year bonus thats the
cooperative equivalent of a profit. Add it all up, and you
may well do better than Wall Street.
A group of scholars at the University of Wisconsin
recently surveyed the landscape of U.S. cooperatives and
counted nearly 30,000 cooperatives operating at 73,000
locations.18 The vast majority are consumer cooperatives,
with 343 million memberships (many people belong to
multiple co-ops, hence the number of memberships exceeds
the U.S. population). Credit unions, which are essentially
banking cooperatives, have 92million members. Electrical
utility co-ops reach 42million Americans. The cooperative
sector owns $3 trillion in assets, generates half a trillion dollars a year in revenue, and pays 856,000 people $25billion
in annual wages. Significantly, almost all cooperatives qualify as locally owned businesses.
As a member of a cooperative, other local investment
opportunities might become available to you as well. For
example, a number of cooperatives borrow money from
their members for capital projects at very attractive interest
rates. In New Mexico, the La Montenita Grocery Co-op
Challenges
Your local investment opportunities here, of course, are
limited by which co-ops operate in your community. Most
people can easily find a local credit union and a grocery
co-op, but other kinds of cooperatives may be harder to
find.
Opportunities to lend to ones cooperative are fewer
still. Because such loans are securities, it takes a fairly sophisticated and well-established co-op to perform the necessary
legal work. That said, co-ops embrace a solidarity principle
of helping other co-ops, which means that once a co-op
in your state does the necessary legal work for a loan, its
willing to share it with other co-ops (which can then, with
modest edits, make good use of the documents).
19
$200, the member then holds a full share of the company
and gets the full benefits of membership. Co-op members
then earn money back on purchases through the annual
patronage refund (the amount varies according to the members annual purchases and City Markets annual profit). In
2014, patronage checks were issued to over 10,000 members, with an average check of $93. This amounted to over
$968,000 being recirculated into the community.
According to Allison Weinhagen, Director of
Community Engagement: We currently have 10,883
members. Since they own equity in the co-op, they are not
only members but also owners. The co-op members elect
a board of trustees to manage the operations of the City
Market.
Anjanette DeCarlo says becoming a member at City
Market has been a very smart and safe investment for several reasons. To start, while it costs $200 to become a member at City Market, she receives a dividend of about $150
at the end of the year, which is close to a 100% return on
her initial investment in just one year. While City Market
does not currently ask their members for loans, she says, If
they were to ask me for one, I would invest because I am
investing small amounts already and seeing large returns. In
addition, it is low risk and in line with my morals because
they are supporting the local community.
Another benefit for members is the confidence they feel
in the integrity of their food. Most if not all of the food
comes from local farms and businesseslike Lewis Creek
Farm, which counts City Market as one of its main customers. Every City Market purchase increases the amount of
money invested in local farms and businesses.
20
3. LOCAL BANK OR CREDIT UNION
Description
During the financial crisis, when several large banks jacked
up the fees they were imposing on checking accounts,
Arianna Huffington (who publishes the popular online
news site Huffington Post), financial televangelist Suze
Orman, Rob Johnson of the Roosevelt Institute, and
author/filmmaker Eugene Jarecki teamed up to encourage
Americans to move their money out of big banks in the
name of community revitalization. Hundreds of thousands
of Americans, perhaps even millions, did so. Jarecki even
made a short film that used clips from Its A Wonderful
Life to illustrate the problem (see http://www.youtube.
com/watch?v=Icqrx0OimSs).
Credit unions are member-owned financial cooperatives; they are not-for-profit and do not have outside shareholders. Instead, excess profits go back to the memberowners in the form of higher saving rates, lower loan rates,
and more affordable services compared to offerings from
private banks.
The case for moving your money into a local bank
or credit union is powerful. A dollar deposited in a local
bank or credit union is about three times more likely to
be lent to a local business than a dollar deposited in a big,
interstate bank. As Stacy Mitchell at the Institute for Local
Self-Reliance argues: Although small and mid-sized banks
($1billion or less in assets) control only 22percent of all
bank assets, they account for 54percent of small business
Challenges
If you have just a savings and checking account, moving
your money to a local bank or credit union is relatively easy.
Many Americans, however, have a variety of credit cards
and loans with their banks, which means that changing
banks may take a focused effort over many months or even
years. Refinancing a mortgage through another bank, for
example, can be quite time-consuming.
A mindful local investor seeking to refinance a mortgage through a local bank or credit union also should make
another inquiry: Will the institution resell your mortgage to
a larger banking institution or repackage it for the secondary market? If the answer is yes then the benefits of local
banking will be short-lived, and the 30 years of mortgage
21
interest youll be paying will instead go to a nonlocal institution. Fortunately, its usually possible to find a local institution that doesnt resell its mortgages.
22
4. SELF-DIRECTED IRA
Description
Challenges
Since virtually no pension funds today offer meaningful options for investing in local business, one alternative
worth considering is to create your own self-directed IRA.
Under existing tax law, you can hire an IRS-licensed custodian who must follow and implement all your investment decisionsincluding, if you want, local investments.
All investors, whether or not they are accredited, can take
advantage of this.
Any investments you are permitted to make as an individual are possible with your tax-deferred IRA dollars, with
two exceptions: You cannot invest in your own business or
your kids business; and, you cannot invest in your own
house or your kids house. (However, you could invest in
your neighbors house, and your neighbor could invest in
yours, as long as it wasnt a quid pro quo transaction.)
If you shop around, you should be able to find
a licensed custodian who will charge you as little as
$200 per year. A list of some licensed custodians can be
found here: http://selfdirectedira.nuwireinvestor.com/
list-of-self-directed-ira-custodians.
You also might convince your local bank or credit
union to provide a self-directed IRA as a service for their
customers generally. (General requirements for a financial
institution to set up a self-directed IRA can be found with
the Internal Revenue Service.)
23
Duane first arrived in Vermont via Los Angeles in 1996
at the behest of the famous Ben and Jerry, who recruited
him to take on the role of their Chief of Stuff, the companys internal agent for social change. When the company
was sold in 2000, Duane was working with the Vermont
Public Interest Research Group (VPIRG), the states largest
consumer and environmental advocacy organization.
As Board President at VPIRG, Duane immersed himself in research and advocacy around clean energy. Together
with VPIRG staffer James Moore, he imagined a market
solution to climate change. They launched SunCommon
to make solar energy more affordable through group
net metering, whereby a community of homes can draw
their electricity from a group-owned solar array. When
SunCommon needed financing for their first solar array
project in early 2014, the Vermont Community Loan Fund
(VCLF) stepped in to offer local financing.
Thats what convinced Duane to figure out a way to
redirect his IRA into the VCLF. It was a challenge for Duane
to convince the custodian for his IRA, Schwab, to vet the
loan fund so that he could self-direct it there, but he persevered and succeeded. He needed to fill out forms to prove
to the custodian that the VCLF was a legitimate investment
and affirm that Duane was willing to take risk outside the
SEC-regulated world. All this work required him to pay
extra fees (which is why, historically, self-directed IRAs have
only been used by wealthy individuals).
VCLF is now in my safe investment pool, Duane
says. They have a great track record of supporting what I
want to support, while also being successful and paying the
money back. But I also want to invest in ways that reflect
my values. Ill get some return on investment while promoting values-led endeavors.
24
5. PENSION FUND
Description
Very few pension funds currently offer local investment
options, but as local investment opportunities spread in the
larger economyand especially as local investment funds
get establishedthis will change. For now, the best you can
do is apply pressure. You can write letters to the fund managers or to the top brass insisting that they create a local
option, or better still, organize your colleagues to carry
out a letter-writing campaign. This is how, over the past
25 years, proponents of screened or impact investing
convinced many pension funds to divest from companies
that were conducting business in apartheid South African
or manufacturing nuclear weapons.
You might point out that your request is not unprecedented. A few large state employee pension funds have
made experimental investments in what they call in-state
businesses. Since 1999, the New York State Common
Retirement Fund has targeted more than $800 million
into in-state investments, including $271 million in 107
companies based in New York.21 In 2008 the Michigan
Retirement System committed $300 million to Invest
Michigan!, which contains two funds that support promising companies based in the state. Similar investments have
been made by public employee pension funds in Ohio,
Indiana, North Carolina, and New Jersey. These economically targeted investments have been criticized for their
relatively poor performance, but the blame hardly belongs
Challenges
Under a federal law called the Employee Retirement
Investment Security Act (ERISA), pension fund managers have to fulfill a number of fiduciary duties. Some are
straightforward: no stealing, no self-dealing, and report
your every investment action often and honestly. More
formidable is the duty to exercise a standard of care, skill,
prudence, and diligence. Not a few fiduciaries have taken
the position that this standard demands that they give their
pensioners the options of stocks or bondsperiod. Choose
between Tweedledum and Tweedledee.
For now, the absence of actual local mutual funds
makes arguing about the contours of your representatives
fiduciary duties rather abstract and premature. Once more
local investment funds are around, employees can begin
demanding that their fiduciaries include them on their
401(k) menus. The essential argument is simple: How can
you possibly claim to be my fiduciary if you insist on investing my money, against my wishes, in destructive global
businesses rather than in the local businesses I care about?
You are my fiduciary, not Wall Streets.
25
Burlingtons Pension Money
Provides Affordable Housing
The Champlain Housing Trust in Burlington provides permanent affordable housing to residents by controlling the
land the house occupies and splitting equity ownership to
control for speculative market appreciation. It has developed over 600 units of permanently affordable housing
since its inception in 1984, when Burlingtons Community
and Economic Development Office provided a start-up
grant of $200,000 to launch the Burlington Community
Land Trust (which has since been expanded and renamed
the Champlain Housing Trust). The city also supported the
trust with funds from its Community Development Block
Grant (CDBG) and loans from the municipal employee
pension fund.
The pension funds were provided to the trust as loan
capital to acquire more property. The trust drew on the
funds loan by loan, deal by deal. To keep the funds safe,
fund managers lowered the risk by applying fairly conservative loan terms: loan-to-value ratios that mirrored traditional bank mortgages. The pension fund made a seven-year
loan repayable with one large balloon payment at the end.
Using this model, the city was able to provide the trust
a much better interest rate than what other financial institutions were offering (interest rates were very high in the
1980s). The Burlington Savings Bank matched the loan with
a new seven-year balloon loan to pay off the pension fund.
For this particular project, involving buying up properties as
neighborhoods were rapidly gentrifying, the land trust also
used CDBG funds obtainable through federal grants.
26
6. LOCAL INVESTMENT CLUB
Description
Many of the investment options mentioned above, like a
self-directed IRA, require considerable work on your own
and require you to assume considerable risk yourself. If you
want to share some of the work and the risk, you might
consider forming an investment club with an express mission of investing locally.
The SEC exempts investment clubs from formal
approval, on one big condition: Every single member must
be actively involved in every single investment decision.
Consensus is not required, just open decision-making. If
that criterion is met, a club can pool money from its members, invest in local securities, make profits, and provide its
members with a nice check at the end of each year. But as
soon as even a single member becomes passive and starts
relying on the investment advice of others in the club, legal
alarms get tripped.
Clubs must have fewer than 100 members; practically
speaking, they probably should have fewer than 30. If
youre going to put together an investment club, you want
to have a good, working relationship with other members.
And you want to have a good time when you meet! If you
have too many members, with the requirement that everyone debate every decision, the club could become a bureaucratic nightmare.
One of the first local investment clubs was No Small
Potatoes in Maine, launched by the local chapter of Slow
Challenges
Note that unaccredited investors cannot pool their money
in an investment club to be treated as a single accredited
investor. In fact, if a club has a single unaccredited investor, then it can only invest in businesses that legally can
accept money from unaccredited investors. In the case of
No Small Potatoes, the club got special permission from
the Maine Department of Securities for unaccredited investors to make small loans to struggling farmers and food
entrepreneurs.
27
local businesses, he says. The club plans to form an LLC
and issue 100 shares in late 2015. It will require a minimum
investment of $1,000 per share and allow each participant
to purchase up to 10 shares for a total of $10,000.
Thus far, Aldrich has faced two challenges. One has
been recruiting members. Finding those committed members is hard, he says, because in rural Vermont not a whole
lot of people are in a financial position to invest.
The other challenge has been preparing the Operating
Agreement, which lays out the mission, the types of
investments the club will pursue, and the rules for decision-making. Aldrich drafted the document based on one
put together by the popular Sprout Lenders club in Boston
(http://www.sproutlenders.com). Members of the White
River Investment Club have one vote per share when making investment decisions (again, with a maximum of ten
shares per member).
One interesting conversation within the emerging
group concerns how much risk they are willing to take collectively. Aldrich has found that if the problem is framed
simply as risk versus reward, the group is surprisingly willing to expose their principal to risk. The potential of an
investment serving the communitys well-being increases
the risk tolerance even more.
Ultimately, members will be encouraged to create offshoot investment clubs in other Vermont communities so
that they do not need to travel great distances.
30
1. CONVENTIONAL SOURCES
Description
If you are like many entrepreneurs seeking capital for your
business, you will naturally turn first to yourself. You might
choose to not take a salary or to retain company earnings
for reinvestment. You might take out a second mortgage
on your home or take a cash advance on a personal credit
cardin which case you should certainly prioritize doing
these things with your local bank or credit union (as discussed earlier). Other sources of local capital that might be
available include microenterprise funds, economic development funds, community development financial institutions, community development corporations, or state-specific funds (like the Flex Capital Fund of the Vermont
Sustainable Jobs Fund, described on page 76). The U.S.
Small Business Administration (SBA) has programs that
help shore up loans from nervous banks, though they too
require that you put your house on the line.
If youve exhausted these resources, remember that you
might approach local friends and familyand if thats not
enough, you can always search more widely.
Challenges
The most common sources of capital for early-stage entrepreneurssecond mortgages, credit cards, SBA programsare all about debt. If you (like many entrepreneurs
who barely survived the last financial crisis) are now trying
to get out of debt, some of these options will be unacceptable. Plus, you might not have enough equity in your home
to qualify for additional funds. Remember, all banks
including those that are locally ownedare very conservative with their money, and prefer lending to borrowers with
ample collateral.
Additionally, credit cardseven those nominally issued
by a local bank or credit unionsuck many of your repayment dollars outside the community. Its good to find local
alternatives.
Finally, remember that if you take a loan from friends or
family and promise to pay it back with interest, the law considers that transaction a security. Most states dont require
exhaustive paperwork for transactions among friends and
family, but different states define these preexisting relationships differently.
31
sore part of the body. In addition, the derived hydrosol can
be deployed as an antiseptic. Some local scientists are even
testing Boswellness products as an anti-cancer agent.
To get this company off the ground in its first six years,
the four founders decided to tap their retirement savings.
The four cashed out their IRAs (paying the penalties for
doing so) and added any additional savings they had. They
also worked other jobs to provide income for themselves
while investing in the business.
With this self-financing (which might be regarded as
the purest form of local investment) Boswellness was able
to purchase raw materials and the equipment necessary for
distillation. All of this was done in a way to avoid the laborious approval process of obtaining a loan from a bank. The
capital and the decision-making power thus stayed in the
hands of the founders.
Originally called Ismael Imports, the company eventually reached a point where the income was enough to cover
the payments on a loan from a bank. They obtained a loan
to rebrand as Boswellness and accelerate marketing efforts.
32
2. ACCREDITED INVESTORS
Description
Because investment apartheid gives accredited investors
the freedom to invest as they see fit, local accredited investors are among the easiest potential sources of capital for
your business. You might approach angel investorsthat
is, wealthy individuals who might have a passion for your
business. You might ask a nearby club of angel investors if
they would allow you to pitch your proposal to their members. You might talk with a nearby venture capital fund;
such funds typically invest deeply in just a few dozen businesses with high growth potential for five to ten years. You
might also approach local institutions with strong community tiessuch as churches or labor unionsthat have
pension funds.
Still another local institution that might invest in you
is a major company with whom you do business. For example, Whole Foods has been committed to strengthening
small food businesses that are its most promising suppliers.
Some accredited investors might enter a one-on-one
debt relationship with you, drawn up specifically for the
transaction. If you enter a debt, equity, or royalty agreement
with multiple accredited investors, you may need to formalize it through a private offering (see below).
In Vermont, there are several organizations that are
pooling the resources from accredited investors for specific statewide goals, like renewable energy and sustainable
food systems. These include: foundations like the Vermont
Challenges
While almost every economic development agency in the
country now touts the activities above as indicators of their
support for local business, the hard truth is that the chance
of any one local business receiving investment from accredited investors is exceedingly low. Even churches and unions
tend to prefer publicly traded socially responsible businesses
that seem to offer better returns at lower risk.
Despite accredited investors having the legal freedom
and means to invest locally, very few do so. Unaccredited
investors, especially those putting smaller amounts of
money into local businesses through crowdfunding, have
shown themselves to be less focused on the promise (usually
the hype) of high rates of return.
A cautionary word about venture capital. Some venture
funds, including those with the words community development in their title, can be harmful to community economies if they take over the companies they are nurturing,
and then fire the founding (local) management team. Nor
is it helpful if, after five to ten years of support, the fund
33
takes the most promising businesses public, which destroys
local ownership.
34
3. PROGRAM RELATED INVESTMENTS
Description
An especially promising accredited investor that might
invest in your business is a local foundation. A foundation is
a nonprofit that wealthy individuals, families, or companies
give money to that is then obligated to use the money in
perpetuity to serve the public interest. Tax law requires that
a foundation give away at least 5% of its assets each year to
qualified individuals or nonprofits. It is free to invest the
remaining 95% however it wishesincluding locallyas
long as the investments meet basic standards of prudence.
You might approach a local foundation to consider
making an investment in your company. Your case will be
stronger if the foundation is a community foundation,
which has an express mission of supporting local well-being.
According to the Council on Foundations, there are about
750 community foundations in the United States that give
away about $4.3billion each year. Some of their $86billion in assets can and should be invested locally. Indeed,
several community foundations, such as the Incourage
Community Foundation of Wisconsin, have committed
themselves to investing 100% of their assets locally.
If your business is related to the programs of the foundation, your local philanthropists might have an additional
reason for investing locally. Hence, a foundation that fights
hunger might be interested in investing its endowment in
local food businesses. The Internal Revenue Service has a
number of rules concerning so-called program related
Challenges
Even though foundations have enthusiastically discussed
PRIs for a generation, very few actually use them. Today,
about one-tenth of onepercent of foundation assets is being
invested this way.23 Most foundations have outsourced their
investments to conventional investment advisors who have
little interest in local investing. Bigger foundations with
in-house investors tend to erect a Chinese Wall between the
grant-giving side and the investing side, with the latter not
being very open to the unfamiliar world of local investing.
But the rationale for bringing a foundations investments in line with its grants is quite compelling. Some
foundations trying to prevent climate change, for example, have been stunned to discover that their investors were
placing their most of the assets in fossil fuel companies!
35
The Vermont Community
Foundation
Several foundations in Vermont have dabbled with program
related investments. The Vermont Community Foundation
(VCF), for example, makes below market investments in
things that benefit Vermonters such as affordable housing.
In addition to its grantmaking, VCF has decided to put 5%
of its investments back in Vermont. Some of this money
goes specifically into Vermont companies like SunCommon
or Vermont Smoke and Cure. Some goes into community
development financial institutions (CDFIs) like Vermont
Community Loan Fund, the Vermont Sustainable Jobs
Funds Flexible Capital Fund, Northern Community
Investment Corporation in the Northeast Kingdom, and
Community Capital in Barre.
The chart at right tracks VCFs investments in impact
areas such as child care centers, food and farming, affordable housing, and renewable energy. According to Deb
Rooney, Chief Financial Officer for VCF: We see the 5%
were putting in Vermont as part of the impact were having
in the State of Vermont beyond our grantmaking, through
either lending to the CDFIs or through direct investment
in related companies.
It is also one of the services we provide our donors,
Rooney adds. When people make donations to the
Community Foundation, they know that well be looking
for opportunities to invest the funds so that they have an
impact. Our pool is now up to $8million.
36
4. COOPERATIVE OPTIONS
Description
Cooperatives provide not only a relatively simple way for
consumers to invest in their community but also a tool for
entrepreneurs to raise capitalin at least three separate
ways. First, a company that structures itself as a co-op can
amass a significant amount of capital without triggering
expensive securities work. The reason is that under federal and state laws, a co-op membership is not considered
a security. Co-ops can be created around several different types of stakeholders, including consumers, workers,
producers, or a combination of these (a so-called hybrid
co-op). Whenever a business requires significant capital to
get started, a co-op structure offers an inexpensive way of
raising it.
Second, a co-op can borrow money from its members,
and many pay their members very handsome interest rates.
But a loan program like this is a security, and ifas is likelya significant number of the members are unaccredited,
your co-op will have to prepare an offering statement, or
borrow one from another co-op (as discussed earlier).
Third, a co-op can invest up to 40% of its capital in
other businesses without being treated as an investment
company (which would carry very expensive legal and
accounting costs). For example, Co-op Power in Western
Massachusetts provides discounted energy goods and services to its membersbut one of the tools that it uses to
strengthen its partner businesses is investment. Thus it has
invested in local companies manufacturing biofuels, installing solar cells, tightening household efficiency, and making
woodchips for household heating.
Challenges
Co-ops are highly democratic business structures that excite
some entrepreneurs and terrify others. Every member gets
one vote, and many co-ops find themselves investing significant time in electing boards, holding meetings, vetting
management, and setting exacting standards of governance.
Entrepreneurs who prefer working in a team rather than
solo tend to find cooperatives more satisfying experiences.
Its worth noting that in Canada, the provinces of
British Columbia and Alberta allow co-ops expressly for
investment. Indeed, every dollar a resident put into these
co-ops qualifies for a 30 percent tax credit. This kind of
structure is not permissible in the United States, in part
because of restrictions in the Investment Company Act
of 1940, which covers all kinds of companiesincluding
co-ops.
37
Cooperative Skiing
This story is provided by Mad River Glen; reprinted with
permission.
Mad River Glen is the only ski resort in the country
that has survived by re-establishing itself as a cooperative.
The story starts with Roland Palmedo, the founder of Mad
River Glen and an original investor at Stowe, who envisioned a ski area where sport, not profit, would be the guiding concern. He believed that a ski area is not just a place
of business, a mountain amusement park as it were. Instead
it is a winter community whose members, both skiers and
area personnel, are dedicated to the enjoyment of the sport.
In 1972 a group led by Truxton Pratt purchased Mad
River Glen, and his wife Betsy Pratt took a controlling
interest of the Mad River Corporation upon his death in
1975. She worked hard to maintain Rolands vision. When
Betsy decided to sell the ski area, she concluded that the
only people she could really trust to steward this crown
jewel were Mad River Glens loyal skiers.
On December 5, 1995, the Mad River Glen Cooperative
was formed, becoming the first and only cooperatively
owned ski area in America. This meant that Mad River
Glens famously loyal skiers owned their mountain. The sale
of Mad River Glen to its skiers occurred in an era when the
ski industry was consolidating and becoming homogenized.
Mad River Glen bucked the trend by remaining independent and preserving a ski experience that exists nowhere
else. The mission of the cooperative is to preserve and protect the forests and mountain ecosystem of General Stark
Mountain in order to provide skiing and other recreational
38
5. PRE-SELLING
Description
Challenges
39
provide their customers with regular boxes of fresh vegetables, meat, and/or dairy products every week. The Northeast
Organic Farming Association (NOFA) maintains a list of
farms that allow customers to pre-buy for the season. The
list can be found at:
http://nofavt.org/find-organic-food/csa-listing.
One well-known case of a business raising capital
through pre-sales is Claires Restaurant in Hardwick. The
founder originally wanted a community-owned restaurant,
but she was intimidated by the SEC rulesso she pre-sold
meals at the restaurant instead (the restaurant started in
2008 but has since gone out of business). Other restaurants
that have used this method of raising money for capital and
are still in business include Kismet in Montpelier and The
Bees Knees in Morrisville.
In Montpelier, the Savoy Theater turned to pre-selling
show tickets when a flood ruined their downstairs space and
they needed money to rebuild. The community stepped up
and bought lots of early tickets to movies at the theater,
which today operates both upstairs and downstairs thanks
to the community support they received.
40
6. SPONSORSHIP WEBSITES
Description
Kickstarter is a website designed to support great projects in
the fields of food, design, fashion, technology, games, comics, and journalism. People pitch their idea (often with a
memorable video), lay out their financing goal, ask for contributions in small dollar amounts, promise small gifts to
patrons (T-shirts, record albums, books, special-events invitations), and if the goal is met in the targeted time, the deal
consummates. Because Kickstarter awards sponsors gifts
of only token value, securities law is circumvented. Who
would possibly give $25, $100, or $1,000 for a T-shirt?
Well, last year Kickstarter did about a half billion dollars
of transactions.
To date, Kickstarter users have pledged over $1.6billion and successfully funded over 82,500 projects. However,
Kickstarter is not a guaranteed source of funding, because
only 38% of the projects reach their fundraising goals (projects that fall short receive no funds).
While Kickstarters rules explicitly say no business
funding, projects only, the fine print provides clever entrepreneurs with a clear map on how to proceed: If your project hopes to make money, thats perfectly fine! Rather, were
underlining that we only allow projects. A project is something finite, with a clear beginning and end. Indiegogo,
a similar website intended for limited campaigns, might
also be used to fund business-related projects.
Other sites are more explicitly welcoming of businesses.
Challenges
While there are examples of spectacularly successful campaigns on Kickstarter, a business raising funds there should
know that the typical successful raise is under $10,000
and, again, usually for a narrowly defined project. Success
depends on the business appealing to its preexisting fan
base. Businesses without such a list are unlikely to win the
hearts and minds of complete strangers.
Another problem is that Kickstarter, Indiegogo, and
the other most successful sites are global. While they can
be used by local businesses connecting with nearby fans, a
truly local raise might prefer to use one of the smaller sites.
Better still, use a site that has established an ongoing presence in your community so that the fans of local businessA
can potentially become the fans of local businesses B, C,
and D.
41
Feeding the Moose
Vermont entrepreneur Ishana Ingerman used Kickstarter
to help start her new company called Winter Moose. She
had been making art out of Little Oaks Art Studio, and
wanted to create locally sourced high fashion and textiles.
After posting her project on Kickstarter, she raised $3,748,
before fees, in just 60 days. Ishana used the money to support the research and development of Winter Moose and its
products, as well as some associated legal fees.
Ishana is a big fan of Kickstarter: It is easy to navigate
the site, with much online support and encouragement.
Its a nice system for connecting with donors and providing updates. She notes, however, that a successfully funded
project must pay Kickstarter fees, including a 5% success
fee, and a 3-5% payment-processing fee.
42
7. P2P LENDING SITES
Description
Challenges
43
Additionally, individuals who make loans to small businesses will receive updates along with their repayments.
44
8. EMPLOYEE STOCK OWNERSHIP PLANS
Description
Employee Stock Ownership Plans (ESOPs) are another
form of local investment. Formally implemented in 1974
through the Employee Retirement Income Security Act
(ERISA), ESOPs enable a company to give equity to its
employeesand for smaller companies this almost always
means local employees. There are roughly 11,000 companies in the United States today with ESOPs, with 11million workers participating. In the vast majority of these
companies, however, the workers are minority shareholders.
ESOPs benefit employees and employers alike.
Employees who receive stock have another source of income
from their work and a greater stake in the company. Various
studies have found that ESOPs tend to increase worker
motivation and productivity. Employers of companies have
discovered that once they implemented ESOP programs,
sales and employment in the company have risen. ESOPs
also provide employers with additional sources of capital
for corporate expansion, and the possibility of the founder
retiring, or just exiting, without destroying the local character of the company.
Challenges
ESOPs carry a number of legal, accounting, and tax complexities, and any employer seeking to introduce an ESOP
program will need to invest considerable time and money
Gardeners Supply
When Will Raap, the founder of Gardeners Supply in
Burlington, had owned the company for four years, his
vision and business philosophy led him to establish an
ESOP in 1987long before a well-known 2000 study from
Rutgers University25 that identified benefits of employee
ownership like higher sales per employee, higher productivity, and longer company life.
Too much of todays economy rewards capital providers at the expense of employees, especially when outside
capital is needed to grow, says Will. I knew Gardeners
Supply would need new resources to grow, and rather than
look to outside investors for funding I chose to unleash
employee engagement and commitment to stretch scarce
resources as a way to help us support a growing business.
It worked.
According to Chief Operating Officer Cindy Turcot,
one of the keys to their success has been the combination of
45
employee ownership and active engagement of employees
in the operation of the business. Its all about participation, Cindy says. When you have an ownership culture,
and work to get employees involved, they really start to
care about company performance. Gardeners Supply gets
employees involved in a number of ways, including monthly
staff meetings, an annual meeting thats the equivalent of a
shareholders meeting, small group town meetings with
CEO Jim Feinson.
Employee feedback is an important part of the
Gardeners Supply culture. They have an organizational efficiency process that identifies needed improvements based
on employee feedback. When you hear the system is too
slow 100 times from employees, you make it a top priority
to fix it, Cindy says. It makes it easy to figure out what
to improve. The company even has a brownie for your
thoughts program, where suggestions and feedback are
rewarded with a tasty pastry.
If we had not chosen the employee ownership route,
we probably would have been purchased by another buyer
who would have moved us out of state, Cindy says. Im
sure they would have consolidated the call center and the
distribution center. It keeps jobs in Vermont.
Companies in Vermont who are interested in exploring
ESOPs can receive assistance from the Vermont Employee
Ownership Center, which provides education, training,
technical assistance, business assessments, and even an
employee ownership loan fund. According to director Don
Jamison, out of 200 firms that have taken advantage of their
services, 23 have converted to either ESOPs or cooperatives
in the past few years. Our focus since the beginning has
46
9. PRIVATE OFFERING
Description
Since securities laws were enacted in the United States
in the 1930s, exemptions have been available for local
businesses to obtain investment from grassroots investors
through personal contact. This investment can be in any
formdebt, equity, royalty, or things in between like convertible notes.
The most common exemption is Regulation D
Section 504, which allows a company, after filing a simple form, it to raise up to $1million from as many as 500
accredited investors and 35 unaccredited investors. Recent
federal legislation increased this ceiling to 2,000 accredited investors. If your company exceeds this number, it is
then presumed to be a public company, which greatly
increases the annual requirements of reporting to the SEC
and to your shareholders. Other provisions of Regulation
D, Sections 505 and 506, allow businesses to raise more
money, but require more paperwork and legal expense.
Challenges
If a business has even one unaccredited investor, however, it
must prepare a Private Placement Memorandum, which is
basically a structured business plan. A business can prepare
this on its ownthere are lots of models onlinebut hiring
an outsider to do one may impose an additional expense.
The principal difference between a private and a public
47
whowith a group of older organic farmers and producers
from the back-to-the-land generation of the late 1960s and
70swere turning northeastern Vermont into a sustainable agriculture hub.
As a startup, HMS was funded by a bank line of credit
guaranteed by Toms parents. In 2001, the company had
sales of $18,000. When Tom got in touch with Clean Yield
in 2007, sales had grown to $700,000not enough to satisfy his creditors, but enough to foretell the possibility of
paying them off.
By 2007, Tom and Meredith realized that they needed
about $800,000 in cash to set the stage for ten years of
orderly growth. The money was needed for inventory,
working capital, and to pay off a few high-interest debts the
company had incurred. They didnt, however, have much to
offer in exchange for the $800,000. They did have equity
(encumbered by debt), but offering equity was problematic. Unlike venture capital deals where the exit strategy
is to sell the company and pay off the investors with piles
of money, Tom and Meredith wanted to retain control and
ensure that the company remained in the Wolcott community. Without selling out, they wouldnt have the cash to
pay off the investors with venture-capital-like returns.
What they needed were investors who were willing to
lend or invest their money without expecting much of a
financial return but who did expect a high social return.
These folks are now widely known as Slow Money investors, but at that time there was no name for themand
Tom, Meredith, and their lawyer, Eli Moulton, had no idea
whether such a breed of investor even existed. But Rian did.
They were the clients of Clean Yield who had long wanted
48
foundations who were eager to invest. Fittingly, a thirteenth
investor came aboard at one of the first Slow Money events
held in the country. High Mowing Seeds was arguably the
first fully realized Slow Money investment vehicle, and it
did not go unnoticed. In fact, there was so much interest in
the HMS investment that it was oversubscribed. HMS was
able to bring four more investors aboard at the same terms
to finance more inventory and a climate-controlled room
to house the seeds, a project slated for a few years down the
road.
49
10. DIRECT PUBLIC OFFERING
Description
The typical way big companies involve many investors is
to go public through an initial public offering (IPO).
The typical IPO aims to place a security on the NASDAQ
or another major stock exchange, raises hundreds of millions of dollars (or more), involves major underwriters like
Goldman Sachs, and incurs legal expenses that easily can go
into the millions. The architects of securities laws understood that there needed to be more affordable routes for
small businesses to go public, and so various exemptions
to full-scale securities registrations were enacted to allow
direct public offerings (DPOs) to raise smaller amounts of
capital
One federal exemption is Regulation A, through which
a company seeking to raise less than $5million can involve
an unlimited number of unaccredited investors and advertise freely to acquire them. An example of a company that
used this exemption is Annies Homegrown: It recruited
consumers of their popular macaroni and cheese products by putting the offering statement right in the box
along with the uncooked noodles. Raising money under
Regulation A, however, can easily cost $50,000-$100,000
in legal expenses.
A more popular and inexpensive exemption is the
intrastate offering. Federal securities law basically leaves it
to states to regulate a securities offering that a small business makes just to in-state residents. The restrictions for
this offeringthat the company sells to mostly in-state residents and has facilities mostly in the stateare slam dunks
for most locally owned businesses. When Ben & Jerrys
first went public, the company only allowed residents of
Vermont to invest.
Companies that go the route of Regulation A or the
Intrastate Exemption sell shares directly to the public,
often through their websitehence the term direct public offering. Most states allow direct public offerings with
unlimited size and an unlimited number of unaccredited
investors.
Challenges
Lawyers typically charge $25,000-$50,000 for a DPO,
and several months may be required to get a proposed
DPO approved by a state securities office. Intrepid entrepreneurs may find ways to cut costs further; for example,
Jenny Kassan, a California-based attorney with expertise in
DPOs, offers lower rates for local businesses that wish to go
through a do-it-yourself boot camp.26
50
Taking Pickles Public
In 2001, Real Pickles was founded by Dan Rosenberg in
Greenfield, Massachusetts, to make and market high-quality pickles from locally grown vegetables. Wanting to convert the business into a worker co-op, Dan and his future
co-owner, Addie Rose Holland, needed to raise capital.
But they were unsure how much they needed. They spent
six months working on a five-year sales and marketing
plan which outlined how the company would use digital
communication and other media outlets to promote Real
Pickles events, tours, and investor briefings.
After determining that they needed half amillion dollars, Dan and Addie Rose decided to explore a few untraditional avenues of obtaining investment. The Cooperative
Fund of New England contributed a portion of the investment through a special fund designed to assist young co-ops.
The five future worker-owners each invested $6,000.
Because the future co-op still needed much more capital, in 2013 Dan and Addie Rose decided to offer non-voting preferred stock via a direct public offering (DPO).
Because it was also intended to help build grassroots support, they called the DPO a community investment campaign. Through this public offering, Real Pickles was able
to raise $500,000 in just two months. The seventy investors
included customers, suppliers, and other co-ops, all located
in Massachusetts and Vermont. Each investor needed to
purchase a minimum of one hundred shares at $25 per
share.
Dan says that selling non-voting preferred stock equity
investments was the cheapest financing optionone that
52
1. CREDIT UNION
Description
Not every community has its own bank, and not every
community with a bank has one thats locally owned. There
is one powerful reason why a community without a local
financial institution might want to create one: A dollar
deposited in a local financial institution is three times more
likely to provide commercial credit to local businesses than
a dollar deposited in a nonlocal financial institution.
The general view now is that creating a new bank
especially in an era of tougher regulations with the recently
passed Dodd-Frank legislation (see page 9)could require
at least $12-$20million of capital, with hundreds of thousands of dollars of legal expenses.
But the price tag for setting up a credit union is considerably lower. According to the National Credit Union
Administration, the key steps include organizing 500 initial
members (if you can top 3,000, the regulatory requirements
are simpler), collecting an initial member fee of $5-$25 per
person, and creating an overseeing committee, ultimately
with at least one certified public accountant (CPA). Small
credit unions can be operated from a desk with a computer,
and need not have a full-time staff person.
Challenges
While starting a credit union is not as difficult as starting
a bank, its not necessarily easy. Without full-time staff, its
essential that a volunteer board be prepared to invest enormous time to start and run the institution.
Moreover, small credit unions are run like a cooperative
on behalf of their members, which means that the highest
priority is usually personal financial products like checking accounts, debit cards, mortgages, and education loans.
Usually a credit union must grow quite large before it has
enough capital to begin giving commercial loans. So starting a credit union, while localizing local finance generally,
may not immediately boost local business.
53
Getting Opportunities Credit Union off the ground
was not easy. Established in 1989 with a $20,000 grant from
the Burlington Ecumenical Action Ministry, Opportunities
now ranks as a $38 million institution that has made more
than $300 million in loans. Few big-time banks can boast a
repayment rate higher than the 99.5 percent Opportunities
reports. These achievements were acknowledged when
Opportunities won awards from the Small Business
Association in 2013 and 2014.
Opportunities started small and grew smart. The financial counseling service at the core of its operations grew out
of a research project the credit union undertook a year after
it opened its doors. That study revealed that the nonprofit
was shutting out half the people who came to it seeking
loans. They recognized the need for more education on personal financial responsibility, and to be able to offer loans to
members who, despite poor credit scores, may nevertheless
be financially viable and stable.
Opportunities is able to focus some of its resources on
lending to people in poverty by issuing special certificates of
deposit with interest rates lower than those at conventional
banks. Cheryl says these CDs are for community and
social investors who agree to accept a lower rate to allow
the credit union to leverage their investment back into the
community. Our members receive market CD rates.
When the recession in 2008 affected many of the low
income members, Opportunities worked to assist them
for example, by getting grants and low-cost deposits from
various entities in the local community such as corporations, other banks and credit unions, social investors, and
the faith community.
54
2. TARGETED CDS
Description
Challenges
With few existing examples of targeted CDsand considering the significant differences in how they have been
structuredit has been difficult to convince other banks
and credit unions to adopt these models. Each requires serious commitment from the partner bank or credit union to
make it work. It helps if the sponsoring institution is convinced that its not just a do-good program but also will
bring new customers through the door.
55
on it, and the bank would use it as collateral to provide a
low-interest loan to the company? Williamson approached
Wainwright Bank (now Eastern Bank), which had a good
track record for supporting socially responsible companies,
and it agreed to create a special three-year CD, requiring
a $500 minimum deposit, that is open to accredited and
unaccredited investors alike. The CD is FDIC-insured
against bank failure, but it is at risk if Equal Exchange ever
defaults on its loan.
Defying the logic of neoclassical economists, the CD
holders dont demand any increased reward for the extra
risk. They are paid at exactly the same rate as the holders
of conventional CDs. What theyre getting, says Daniel
Fireside, Capital Coordinator for Equal Exchange, is a
social return. Theyre saying, hey, this is really the only vehicle I know of where my bank is telling me exactly what
theyre doing with my money, and its a really great thing
thats in line with my values, and for me thats worth the
tiny extra risk. After three years, the program has over
$1million and over 100 depositors.
In return for that risk, the money that CD holders
deposit can be used for tremendous good. For example
$2,000 can buy, at Fair Trade prices, the complete coffee
harvest of a typical family farm. That 5-acre farm, perhaps
high in a remote Peruvian valley, might support 6-8 people.
So a $2,000 CD can help keep a family on their land, providing hope that they can improve life for their children.
CDs earn a competitive interest rate, too.
Even though the bank is paying Equal Exchange CD
holders the same rate as it pays on other CDs, its margin is
tighter. Superficially, the spread it hascurrently between
56
3. FEDERAL PROGRAMS
Description
Challenges
57
programs is Vermont Rural Ventures, which has received
official federal approval as a Community Development
Entity; this enables it to deploy New Markets Tax Credits.
It has used NMTC funds to finance community development projects in downtown and village centers. These projects include retail and office space, health care, downtown
housing, manufacturing, community centers, food processing, and energy projects.
Under the terms of the NMTC program, an investortypically an accredited in-state investormakes a
seven-year investment and receives a tax credit equal to
39% of the total project over the investment period. (The
tax credit is realized over the seven years: 5% in each of
years 1-3 and 6% in each of years 4-7, for a total of 39%).
Additionally, the investor may receive economic benefits
from the project, including return on capital during the
seven-year investment period. After seven years, the investor can benefit from both the return of capital as well as
return on capital.
Vermont Rural Ventures secured its first allocation of
NMTC money in the spring of 2009, and subsequent allocations in 2012, 2013 and 2014. The projects it has completed with this funding are listed in the table to the right.
City/Town
Investment
Barre
$10.25million
North Springfield
$9.5million
Brooks House
Brattleboro
$11.7million
Commonwealth Dairy
Brattleboro
$6.25million
Community College of
Vermont
Rutland
$8.5million
Enosburg Falls
$1.87million
Burlington
$10.35million
Burlington
$6.2million
$3.4million
St. Albans
$9.38million
Weidmann Technology
St. Johnsbury
$10million
58
4. LOCAL INVESTMENT FUND
Description
Many of the investment fund options currently available
to local investors require them to do a lot of work. Thats
because there are very few investment funds where a fund
manager has done the work for them. But local investment
funds can offer an investor another important advantage
over investing directly in a local company: diversification.
Investors usually want a local portfolio with enough differences among the securities so that for every company that
goes bad there are a dozen that are thriving.
What has limited the creation of local investment funds
is the same thing that has limited the issuance and trading
of local securitiesthat is, obsolete federal and state securities law. Here, the main piece of legislation is the federal
Investment Company Act of 1940. A new local investment
company might have to spend hundreds of thousands of
dollars just to be fully compliant with the regulations.
Not surprisingly, most local investment funds seek to
fit in one of the exemptions in the Act. Among these
exempt institutions are banks and credit unions (they are
regulated by other laws), investment clubs, and nonprofits. The nonprofit exemption has been the most important,
because it covers many community and economic development institutions.
There are two good examples of national nonprofits
that invest directly or indirectly in local businesses and in
which unaccredited investors can participate. RSF Social
Challenges
Unaccredited investors cannot tiptoe around the income
requirements by pooling their money with others. Every
single security in a pool of money involving an unaccredited investor must be from a local business that has gone
public or must fit within one of the SEC exemptions that
allow unaccredited dollars.
Its important to realize that even though these
59
nonprofit funds are exempt from the Investment Company
Act, the securities they each issue to investors must be
papered under the Securities Act. So every year, these
funds must go through the cumbersome process of filing
with state securities agencies for the right to sell their securities to unaccredited investors. RSF Social Finance and the
Calvert Foundation have to do this every year in every state
in which they are selling securities. Some states make this
process easy; others make it very difficult.
60
5. LOCAL STOCK MARKET
Description
Ultimately, a healthy local investment ecosystem requires a
place where holders of local securities, whether debt notes
or stock, can sell them to other potential local investors.
Doing this directly with just the people you know is not
very efficient, so stock markets emerged to provide convenient venues for these transactions. One hundred years ago,
there were local stock markets across the countryspecific
places where people could scream their bids and offers at
one another under a uniform set of rules. Now there are
basically just two such places in the United States, the
NASDAQ and the New York Stock Exchange, and most of
their transactions are done electronically.
These exchanges facilitate public trading of companies all across the planet that have nothing to do with local
investment. There is, therefore, growing interest in creating
local stock exchanges. Michigan recently passed a law mandating that the state create this.
Its important to differentiate stock exchanges from
community portals. Stock exchanges are institutions where
offers and bids for securities are made in real time, and the
last transaction (where offers and bids match) sets the listed
price. Since the securities being sold are already owned by
someone, these transactions are called secondary trading.
Stock markets are fast moving and can change dramatically
in the course of a few seconds. They are governed by the
Securities Exchange Act of 1934.
Challenges
Under the Securities Exchange Act, it is not clear whether
states like Michigan have the right to create stock exchanges
even if the securities are 100% owned and traded in the
state. Its not even clear they have the right to create community portals. While the SEC could issue a no action
letter to permit these kinds of state initiatives, it has not
done so yet.
There are clearly permissible approaches to creating
local stock exchanges, but they are difficult and expensive.
The existing exchanges, like the NASDAQ, have all the
authority they need to set up state exchanges as part of their
business. A new exchange also could file for a license under
the rules for Alternative Trading Systemsa space for some
experimentation in the field.
If youre interested in setting up an exchange or a
portal, also remember that the rules right now limit their
61
operation to broker-dealers. The proposed rules for the
JOBS Act would allow non-professionals to operate a community portal and also to take success fees, which might be
critical to the long-term success of a portal as a business.
Milk Money
After hearing a talk that Gwendolyn (one of the co-authors)
gave about the possibilities offered by the proposed SEC
rules for crowdsourced investment, Janice Shade and her
partner Louisa Schibli looked at each other and said, We
know how to do that. And they started planning a new
business called Milk Money.
Their target audience is the 1,000 or more small businesses that are started in Vermont every year, particularly
consumer products companies. Their goal is to forge connections between everyday investors, accredited investors,
and new business owners to fill gaps in the availability of
start-up business capital for entrepreneurs.
The first company to take advantage of their services
(which include guidance, legal templates, an online fundraising platform, and investor relations management)
is a start-up company that designs lactation pods (privacy rooms) for nursing mothers that are being installed
in airports, public buildings, and other places around the
country.
The 2014 state law that provided for the Vermont
Small Business Offering Exemption (VSBOE) enabled
them to start their business, even as the final regulations for
crowdsourced investment are still awaiting approval by the
SEC. This means that for now, the investors who can use
62
6. LOCAL MUTUAL FUND
Description
Most unaccredited investors today tend to put their money
into mutual funds. A mutual fund is a special category of
investment fund, professionally managed, that invests in
publicly traded securities. Investors can buy into and sell
out (or redeem shares) of a mutual fund as they wish, with
the price of each share set by the net asset value of the
fund. Most mutual funds specialize, which means you can
find bond funds, stock funds, large and small cap funds,
value and growth funds, and index funds. There are about
7,500 mutual funds in the United States, and not a single one invests in local business. A growing number of these
funds invest in companies that are green, labor-friendly,
cruelty free, or meet some other criteria for social responsibility, but none of these companies are locally owned.
Mutual funds must comply with myriad federal regulations under the Investment Company Act of 1940, but two
of the rules bear strongly on the challenge of going local.
The first is that mutual funds must be open-ended. The
term refers to the ability of an unlimited number of investors to put money into the fund or withdraw money as they
wish. The total number of dollars in an open-ended fund
can expand or contract like an accordion. A mutual fund
manager has some criteriabig-company stocks, computer stocks, a mix of 60% stocks and 40% bonds, socially
responsible stocks, and so forthby which she invests the
pool, and then exercises her best judgment about how to
63
Challenges
The legal expenses of setting up a mutual fund are considerableperhaps as high as half amillion dollars to start the
venture, and tens of thousands (perhaps more) every year.
Plus, the managers of such a fund must obtain a number of
licenses and approvals from the SEC and the U.S. Financial
Industry Regulatory Authority (FINRA).
A Dream of a Vermont
Local Mutual Fund
The idea of a local mutual fund in Vermont is still so new
that we dont have an example to demonstrate how it works;
so, here is our shared dream of one:
Imagine its 2025 in downtown Montpelier, Vermont.
The streets and storefronts are filled with thriving local businessescoffee shops with fair trade coffee brewing, clothing stores with locally sewn fashions that compete with the
best you can get in big cities like New York, and restaurants
serving food that is all grown within 20 miles of the city by
organic farmers who are living economically healthy lives.
It wasnt always like this. Before local investing was the
norm, these downtown stores struggled to compete with
the big Walmart in the next town; restaurants closed when
new national chains opened and underpriced them with
cheap food from factory farms; and clothes were almost all
imported from distant places.
Things began to change when the state started to make
it easier for people to direct their savings and investment
to local companies. Crowdfunded investments took off, as
MULTI-CONSTITUENT TOOLS
One of the best ways to support the local investment revolution is to
simply involve everyone: investors, businesses, and finance professionals.
Even student activists can get involved. You could create a chapter of the
Local Investment Opportunities Network (LION) or Slow Money. You
could assemble and promote a list of local businesses and local investors
(and let them do the talking).
66
1. INVESTOR NETWORKS
Description
One of the challenges of securities laws noted earlier is that
even after you do an enormous amount of legal paperwork,
unless you take your company public you still can only
approach investors with whom you have a preexisting relationship. What constitutes a preexisting relationship varies
from state to state, but it probably means more than just
being a Facebook friend. That said, theres no question that
creating better relationships between businesses and investors can help to facilitate legally compliant local investment.
That was the motivation for investment adviser James
Frazier to set up the Local Investment Opportunities
Network (LION) in Port Townsend, Washington, in 2008.
He basically organized monthly parties for all the local businesses and investors in this town of nearly 10,000, plied
attendees with free food and drinks, and at the end of
each event asked attendees to indicate at with whom they
now had a preexisting relationship. He then circulated the
business plans and funding pitches he received from local
businesses accordingly, leaving it up it to individual investors and entrepreneurs to meet and strike their own deals.
Unaccredited investors could participate, though it was up
to each business to create a deal structure that allowed their
money (or not). Because LION was not selling any securities, nor taking commissions or fees, it tiptoed around the
SEC proscriptions against public solicitation.
The result of this one modest social invention has
Challenges
The law regarding solicitation is complicated and confusing.
The JOBS Act changed federal law, freeing up any company
to approach an accredited investor for funding. But a whole
new set of legal requirements have been imposed on companies that solicit this way.
For local investments that are wholly within a single
state, state solicitation rules applyand as noted, these vary
enormously. If youre interested in setting up a LION, its
wise to consult with a securities attorney first to elaborate
the dos and donts for solicitation.
67
locally for fresh food, cooking at home, and enjoying family meals. Woody Tasch, a pioneer in the field of socially
responsible investing, applied these concepts to investing
in his book Slow Money, published in 2010. The public
response was overwhelming, so much so that Tasch decided
to transform his books ideas into a grassroots organization
with the same name.
Across the United States and in other countries as well,
Slow Money chapters are now exploring all the local investment strategies outlined in this handbook, with the goal of
placing one percent of investors portfolios in local farms
and food businesses. The twenty active US chapters, which
involve both professional investors and newbies, have created thirteen investment clubs, and have already mobilized
$38million into over 350 small food enterprises.
The purpose of Slow Money Vermont chapter is to
connect entrepreneurs and investors interested in local food
enterprises, as well as to inspire others. Unlike other angel
investor networks, Slow Money includes unaccredited
investors. By building relationships among entrepreneurs
and local businesses, Slow Money hopes not only to facilitate local investment but also to create relationships that
can solve problems. The Vermont chapter plans to put on
entrepreneur showcases where vetted businesses can present their business plans to potentially interested investors.
Events like these generate not just dollars for local food providers but also social capitalwhich might lead, for example, to offers of technical assistance.
MULTI-CONSTITUENT TOOLS
68
2. COMMUNITY LISTS
Description
One huge obstacle to local investment is information.
Investors think theres no local deal flow. And businesses
think theres no critical mass of interested local investors.
Both groups are probably wrongbut understandably so,
because both groups lack critical information about one
another.
A simple way to overcome this obstacle is to create a website listing local companies that are interested in local investors. Think of a Yahoo!Finance web page, but listing local
businesses. No transactions. No pitches. No details about the
deal. Just information about the company that lets investors
know, if they are interested, who they can email or call to
explore a potential investment opportunity. Additionally,
the web page might also provide a list of local providers of
self-directed IRAs (see above), who could help investors
move tax-deferred retirement savings into these companies.
By providing web visitors with just this most basic
information about the supply and demand of local securities, your community will establish an invaluable framework for a local investment marketplaceessentially an
electronic LION.
Challenges
69
MULTI-CONSTITUENT TOOLS
70
3. SLOW MUNIS
Description
Most local government entities in the United States borrow money, and one of the most common tools they use is
municipal bondsor in investor parlance, munis. General
obligation bonds put the full faith and credit of the local
authority on the line, while revenue bonds commit future
revenues from a given project like a power plant. Like
other securities, they are fully papered by attorneys who
usually make them purchasable and tradable by unaccredited investors. One feature of munis that makes them
attractive to investors is that the interest paidthat is,
the income paid to the bondholdersis exempt from personal income tax.
Munis are often used to support major civic infrastructure projects like bridges, stadiums, convention centers,
and housing projects. They also have been used by local
authorities to support economic-development projects,
usually corporate attraction packages that benefit nonlocal business. Several years ago, Slow Money proposed that
municipalities issue slow munis to support the development of local food businesses. In Cleveland, for example, a
proposal was discussed to issue food bonds, the proceeds
of which would collateralize local loans to high-priority
food businesses.
While the concept of Slow Munis has yet to be widely
used, there are a few intriguing examples. The state treasurer of Massachusetts, Steve Grossman, has issued green
bonds to support the spread of local energy and stormwater management infrastructure in the state.
Challenges
Some government jurisdictions and agencies require special
voter approval for bonds. The willingness of public officials to issue bonds, moreover, may depend on the financial health of the issuing jurisdiction. Ultimately, no one
will want to issue bonds unless theres a clear cash flow to
pay back bondholders in the future. For example, the food
bond idea described above probably requires a municipal
fund to charge banks and credit unions fees for the collateralization to cover risks of default.
71
meals program for single homeless people. The rest became
a three-level office building, shared by the land trust and the
Committee on Temporary Shelter (COTS) in Burlington,
which created housing for homeless people.
The City of Burlington used their bonding authority in
a way that was integral to the deal for acquisition and repair
of the buildings. According to Brenda Torpy, the Executive
Director of the Champlain Housing Trust, We worked out
how to make the commercial space affordable over the long
term to organizations that ran on almost no money. The
debt was large, so we figured out the operating costs versus
what the nonprofits could pay. They ran a capital campaign to make up the difference in the purchase price and
the longer-term affordable tenancy.
The Land Trust needed affordable debt also, so in addition to the capital campaign, a 30-year fixed mortgage was
neededunheard of with commercial properties that go
for standard bank financing. The Burlington Community
Development Corporation (BCDC) had the authority to
issue tax-exempt bonds, and wound up issuing $1.5million
worth. A capital campaign raised another $1.5million to
bring the long-term costs down.
At the time (before the wave of bank consolidations)
there were six local banks, so the Land Trust went to the
six bank presidents and asked them to capitalize 1/6th of
the total bond issue each. Based on the bonds secured by a
mortgage, the banks bought the bonds, and the mortgages
were paid to them. One bank acted as the coordinator and
collected the mortgages. As the mortgages were paid off,
the bond was paid off. The properties were built to standards that were state-of-the-art at the time, and operated
MULTI-CONSTITUENT TOOLS
74
1. THE JOBS ACT AND STATE SECURITIES REFORMS
Description
Challenges
75
a success fee (which might be essential for a portal as a business model). In other words, these states will probably have
to pass follow-on pieces of legislation to clarify and improve
their laws.
If you live in a state with one of these laws, organizing a
grassroots effort to recruit companies and investors to use it
is key to its success. Thats what Hatch Oregon, a Portlandbased incubator, did after they convinced their state securities department to create a crowdfunding exemption. In
the first five weeks, they convinced nine companies to use
the exemption, and collectively they raised over $120,000.
dfr.vermont.gov/reg-bul-ord/rule-providing-vermontsmall-business-offering-exemption.)
Other reforms are being considered as well. For example, changes are being considered to the laws governing peer-to-peer lending in the state. Reformers would
like to exempt more small lenders from current licensing
requirements.
If you are interested in taking advantage of these
reforms, you might contact Vermont Businesses for Social
Responsibility (VBSR), the largest business association in
the state and the largest BSR chapter in the country. Their
regular biannual conferences are great opportunities for
their members and the general public to learn about cutting-edge business practices. In addition, one of Vermonts
business law firms, Merritt, Merritt, and Moulton, provides
educational seminars at a variety of conferences and business meetings.
76
2. STATE FUNDS
Description
Beyond reforming securities laws, states also can create
their own financial institutions to lead local investment
initiatives. While many states funds are simply economic
development programs, redirecting public money to private
companies, a few states have created funds in which private investors can participate as well. Usually, only accredited investors can get involved, but theres no reason a state
could not open up these funds to unaccredited residents as
well.
Several Canadian provinces have reformed their securities laws to make it easier for grassroots groups to form
investment funds. Alberta allows consumer cooperatives
to invest, on behalf of their members, in other local businesses (not just cooperatives). Nova Scotia, a province with
onemillion residents, now has more than 60 Community
Economic Development Investment Funds, which allow
residents to place tax-deferred savings into these new pools
of local securities. For example, FarmWorks invests more
than amillion dollars on behalf of grassroots investors in
Nova Scotian farms and food businesses.
A state also might change other laws to incentivize
participation in local investment funds. Many provinces in
Canada give 30% income tax credits to residents who place
an investment for several years in local co-ops (Alberta),
local investment funds (Nova Scotia), or local businesses
generally (Manitoba). A tax credit like this at the state level
would suddenly motivate mainstream investment professionals to figure out how to help their clients take advantage
of the tax credit.
Challenges
While the tax credits found in Canada could be implemented here, other reforms may be difficult to replicate.
While U.S. states have clear authority to set their own rules
for the issuance of local securities, its not clear that their
authority is for the trading of securities (e.g., whether they
can create a local stock exchange) or for the pooling of securities (e.g., whether they can create special types of local
investment funds). Michigan just passed a law to create the
Michigan Stock Exchange, and a potentially huge fight over
federalism looms.
77
According to VSJF director Ellen Kahler:
One of the core things that were trying to accomplish is a relocalization of the economy for those
goods and services that we can produce ourselves.
For instance, our biofuels work is premised on the
idea of local production for local use. If youre a
farmer and two of your largest input costs are diesel
fuel for your tractor, which comes from foreign oilfields, and feed for your animals, which comes from
the Midwest, could you actually produce some or
all of the fuel and feed you need yourself for less
money and be more self-reliant in the process? We
think you can. So were helping farmers learn how
to grow oilseed crops and turn it into biodiesel for
their tractors and feed for their animals. We cant
replace everything imported into Vermont, but we
can produce a greaterpercentage of our food and
fuel right here.27
78
3. PUBLIC BANKING
Description
Where is your state or city doing its banking? If its not
local, you might lobby for a change.
In 1919, the state of North Dakota set up the first
and only state-owned bank in the United States. Rather
than allow the roughly $6 billion of state tax collections
and federal transfer payments it now receives annually to
be deposited in, say, Chase Bankwhere the money might
support robust economic development in Singapore
North Dakota places the money into its own bank, which
then re-deposits the funds in local banks and credit unions
throughout the state. Consequently, the state has the highest number of local banks per capita, not to mention the
lowest level of unemploymenttrends that, by the way,
manifested long before the recent fracking boom. The bank
currently has $6.8 billion in assets, and earned the state
$94million in 2013.
A populist movement for creating public banks in
other states has been gathering steam around the country.
For the moment, however, reformers are focusing on a more
modest goal of convincing municipalities to switch their
banking. One of their prime success stories comes from
Phoenix, Arizona.
In July 2012, the city announced plans to invest
$50 million in local banks and credit unions. The tricky
part was to ensure that every deposit received insurance
from the Federal Deposit Insurance Corporation (FDIC),
and that limit is set at about $250,000 per deposit per bank
per year. The solution is to use the Certificate of Deposit
Account Registry Service (CDARS), which spreads the
money through a network of local banks nationwide to
ensure that every dollar is covered by federal insurance.
The system encourages reciprocity, so for every $250,000
of the City of Phoenixs investment placed on deposit in,
say, Bangor Savings Bank in Maine, Bangor Savings makes
a $250,000 deposit in a Phoenix bank.
What were the costs of setting up this program? None,
according to city treasurer Randy Piotrowski, Its at market
rate, so were not losing any money. And recently when we
reached the two-year mark, we ended up rolling over most
of the maturing CDs. The only real cost is internal, but we
have an investment manager already on board, so its no
additional work for him. The program was supported by
the mayor, the city council, and civil servants. Even skeptics
lauded the fact that it was a zero-cost economic-development initiative. It helped the local banking community,
says Piotrowski, and provided liquidity to lend to local
businesses and the public in general.
Challenges
Activists seeking to get public banks established have
encountered fierce opposition by mainstream banks, even
in very progressive states like Oregon and Vermont. The
reason, of course, is that an initiative that might move
79
public capital back into local financial institutions poses a
threat to the bottom lines of big banks. An essential political step to creating a state bank, therefore, may be to build
a countervailing coalition of local banks and credit unions.
80
RESOURCE LIST
Directory of Co-ops in Vermont
http://coopvt.wordpress.com/vt-co-op-directory
Directory of Credit Unions in Vermont
http://www.vermontcreditunions.com/findaVTcu.htm
Directory of Licensed IRA Custodians
http://selfdirectedira.nuwireinvestor.com/list-of
-self-directed-ira-custodians
Slow Money Vermont
http://slowmoney.org/local-groups#vermont
Sprout Lenders Club in Boston
http://www.sproutlenders.com
Vermont Community Loan Fund
http://www.investinvermont.org
Vermont Department of Financial RegulationSmall
Business Offering Exemption
http://www.dfr.vermont.gov/reg-bul-ord/rule-providing
-vermont-small-business-offering-exemption
Vermont Rural Ventures
http://www.hvt.org/vrv/vrv.php
81
ENDNOTES
1. Amy Cortese, Locavesting: The Revolution in Local Investing
and How to Profit from It (Hoboken, NJ: Wiley, 2011); and
Michael H. Shuman, Local Dollars, Local Sense: How to Shift
Your Money from Wall Street to Main Street and Achieve Real
Prosperity (White River Junction, VT: Chelsea Green, 2012).
2. Its worth noting, however, that this website, and the Dun
& Bradstreet data it uses, defines local as a business with a
headquarters within the same state.
3. Edward L. Glaeser and William R. Kerr, The Secret to Job
Growth: Think Small, Harvard Business Review, July-August
2010.
4. David A. Fleming and Stephan J. Goetz, Does Local Firm
Ownership Matter?, Economic Development Quarterly,
2011.
5. Anil Rupesingha, Locally Owned: Do Local Business
Ownership and Size Matter for Local Economic WellBeing?, monograph, August 2013. For further empirical
support on this point, see David A. Fleming and Stephan
J. Goetz, Does Local Firm Ownership Matter, Economic
Development Quarterly, August 2011, pp. 277-81.
6. See, for example, Michael H. Shuman, Local Dollars, Local
Sense: How to Shift Your Money from Wall Street to Main
Street and Achieve Real Prosperity (White River Junction, VT:
82
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